The European Central Bank (ECB) will do all it can to achieve its medium-term inflation target of below, but close to two per cent. This was emphasised by Professor Isabel Schnabel of the ECB Executive Board at the Interparliamentary Conference on Stability, Economic Coordination and Governance in the European Union (IPC SECG) on Monday, 12 October 2020. During the first discussion round, chaired by Bundestag Member André Berghegger (CDU), head of the German delegation to the IPC SECG, Federal Minister of Finance Olaf Scholz (SPD), who was the second guest speaker, said that the EU was on the way to a fiscal union, which would constitute “a great advance for financial capacitation and sovereignty”.
ECB Executive Board member Isabel Schnabel defends the bond-purchasing programmes
Professor Isabel Schnabel of the ECB Executive Board said that she did not want to speak of a new partnership between fiscal and monetary policies, because that would be incompatible with the independence of central banks. At the same time, she said, in a context of low interest rates there were “strongly complementary aspects of fiscal and monetary policies that could help to release the eurozone economies from the present trap of slow growth and low inflation”.
Professor Schnabel defended the ECB’s bond-purchasing programmes. Such measures, she argued, were essential to safeguard price stability. At the same time they had had abundant beneficial effects on growth and employment in the euro area. “So monetary policy has not become powerless in the face of falling interest rates”, she said. Nor were the side-effects of these measures as drastic as they were presented in the public debate. For example, she said, there was no evidence “that buying up sovereign debt has undermined the financial markets”.
In Professor Schnabel’s view, the historic decision taken by the European governments to tackle the crisis by means of a joint fiscal response had been not only a powerful sign of European solidarity but also a contribution to stabilising the financial markets and to combating the risks of fragmentation.
She did not share the fears that today’s rise in government debt could jeopardise tomorrow’s price stability. On the contrary, the funds being made available would support price stability and promote the independence of the Central Bank “if they are well used”.
Finance Minister Olaf Scholz: the EU must generate its own sources of income
In the view of Olaf Scholz, Germany’s Federal Minister of Finance, this task was being addressed. Thanks to a targeted strategy of investment in climate action, in the energy transition and in new forms of digital technology, Europe was ensuring its sustainability. In terms of fiscal policy, said Mr Scholz, the route was clearly mapped out. The resources for financial assistance were being borrowed by the EU itself and were to be used for targeted strategic investments and recovery measures and not for funding the current budgetary expenditure of member states. Repayment of the loans, Mr Scholz said, was to begin soon. In addition, sources of income were to be created for the EU itself, said Mr Scholz, referring to receipts from emissions trading, a plastics tax, a digital tax and a tax on financial transactions.
In response to a question from a delegate, Mr Scholz stressed how important it was to generate investment in the real economy. Investors, he said, were seeking safe securities but were not investing in developments that would bring about lasting changes to the economy. It was an important task, he said, to channel funds into such investments.
Concern over rising property prices
Professor Schnabel responded to expressions of concern about rising property prices. In most eurozone countries, said the ECB representative, middle-income households owned property. In this respect, the effects of the rise tended to be beneficial, and adverse effects in countries like Germany were minimal. Asked when the monetary policies of central banks were likely to return to normality, which would include an end to the bond purchases, Professor Schnabel replied that these unconventional instruments were necessary to prop up the inflation rate in the medium term. The future actions of the ECB would depend on economic developments, she said.
Members of Parliament call for rapid disbursement of financial assistance
From the ranks of the parliamentarians came calls for action to ensure rapid disbursement of financial assistance. Olaf Scholz expressed agreement, stating that it must be possible for funds to be used to meet investment needs during the crisis. If it were discernible that the money would still be available in ten years’ time, member states would make long-term plans for its use. “But we want the money to be used now to conquer the future”, Mr Scholz emphasised. The programmes contained provisions to this effect, he said.
Head of delegation André Berghegger: expansive monetary and fiscal policies must remain a temporary arrangement
In the view of Dr André Berghegger, head of the German delegation, the current expansive monetary and fiscal policies were an appropriate response. At the same time, he said, they must remain a temporary arrangement. “We should work towards a ‘more normal’ state of affairs,” he said, “even if it takes some time and reflection”. As a specialist in budgetary policy, Dr Berghegger recommended taking care to ensure that high debt levels in member states were reduced in times of good economic growth. The EU recovery plan, he said, was generating significant fiscal stimulus and was issuing considerable sums in debt instruments. “That should also be a temporary situation”, he warned. It was important that European financial assistance measures should also inject real impetus and that member states did not respond by winding down their own aid schemes, which was something that parliamentarians had to scrutinise closely, said Dr Berghegger.
Calls for reform of the EU Stability and Growth Pact in the second session of the conference
Reform of the EU Stability and Growth Pact was discussed during the second session of the conference. In March of this year, the escape clause of the Stability and Growth Pact was activated at the request of the European Commission in view of the COVID pandemic. At the present time it is impossible to state definitively how long the clause will continue to apply. It seems certain, however, that there will be no one-for-one reversion to the old set of rules.
In the view of Paolo Gentiloni, European Commissioner for Economy, there was a need for simpler rules and a certain degree of flexibility in future. In the debate on changes, however, it must be clear, said the Commissioner, “that a common set of rules is required”. Klaus Regling, Managing Director of the European Stability Mechanism (ESM), also considered reform to be necessary. At the moment, he said, there was a need to establish clarity regarding the member states’ budgetary road maps for the next two or three years. “At the same time,” he said, “we should start to think about a state of stability and how we can frame our budgetary rules to make them transparent and effective”.
ESM Managing Director Klaus Regling: measures taken are in the interests of future generations
In response to a question, Commissioner Gentiloni confirmed that the escape clause would certainly remain activated in 2021 and possibly in the following year too. The determining factor, he said, would be economic developments in the member states. ESM Managing Director Klaus Regling did not accept the argument that the planned high levels of government debt associated with recovery aid would harm future generations. If all the national and European fiscal measures had not been taken, he said, future generations really would be burdened, because GDP would have plummeted even more drastically. The full-scale response on the part of the European institutions and national governments, said Mr Regling, was therefore in the interests of future generations.
A call from the ranks of the Members of Parliament for the prevention of disincentives and the targeted investment of funds was addressed by European Commissioner Paolo Gentiloni, who said that a very clear framework had been set out with binding minimum targets.
European Commissioner: Commission borrowing has altered the fundamental philosophy of the EU
The representative of the Commission also responded to the question whether borrowing by the Commission was a one-off action. Yes, Mr Gentiloni replied, it was a one-off decision, yet at the same time it had “altered the fundamental philosophy of the EU”. If that powerful fiscal instrument worked, said the Commissioner, “that will have implications”. Responding to the objection that such borrowing impinged on national budgetary rights, ESM Managing Director Klaus Regling said that conflicts between the national and European levels should not be overemphasised. It was clear, he added, that member states, by acceding to monetary union, had “given up a certain degree of sovereignty”. (hau/13 October 2020)
The report on the third session of the interparliamentary video conference on Stability, Economic Coordination and Governance in the European Union (IPC SECG) can be read here.
Films of the IPC SECG on 12 October 2020
Here you can get a brief insight into the topics of the video conference for the Interparliamentary Conference on Stability, Economic Coordination and Governance in the European Union on 12 October 2020.
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